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Order to cash (part 3)

Updated 25 September 2024

Read purpose, scope and audience (part 1) and general approach to VAT compliance controls (part 2) of Help with VAT compliance controls — Guidelines for Compliance GfC8, if you have not already.

The overall control objective of Order-to-Cash (O2C) is the timely, complete and accurate recording of transactions and payments.

From a VAT perspective, minimising the risk of error and delays in this process makes sure the right tax is calculated at the right time, and therefore, transactions are made available for reporting through the correct VAT registration and VAT Return period.

The extent to which the O2C process is used may be determined by the systems in place and the business model. For example, businesses selling goods may operate the O2C process to a greater extent than businesses that only sell services. However, there are controls outlined in this section that can be adopted in both cases.

O2C represents the typical set of business functions used to manage Business to Business (B2B) customer orders from sales order, fulfilment, billing, customer payments and recording transactions in financial accounts.

Transactions should complete the full O2C cycle from source document to the general ledger. Larger organisations with Enterprise Resource Planning (ERP) systems should work towards fully automating the workflow as far as possible and manual overrides of application determined values should be subject to tolerance controls and an authorisation and approval process.

Sales order

When an order is placed, the Sales Order (SO) document is raised to begin the order fulfilment process (physical goods shipping or service delivery). Payment may be collected at this stage, or customers may be evaluated for credit approval and the system will check the credit history of existing customers. The VAT rate is usually assigned by the system at the point of raising a sales order — this might be with a tax code. The VAT rate applied will take into account information such as product master data, location of goods and services delivery. We provide more information in General approach to VAT compliance controls (part 2) of these guidelines.

Control points

1. SOs are processed only within approved customer credit limits.
2. Orders and cancellations of orders are input accurately.
3. Records cannot be changed post goods dispatch or invoice.
4. Manual changes to tax codes should be flagged and checked.
5. SO entry data is transferred accurately to the invoicing process.
6. Manual assigning of tax codes should follow a robust process approved by a VAT competent person.

Goods dispatch or service delivery

In a larger and more complex business, goods order fulfilment will usually involve an integrated stock management system. The Goods Dispatch Note (GDN) is a document raised by the fulfilment team on confirmation that goods ordered have left the warehouse or depot. A GDN might accompany the goods to explain the delivery or be sent ahead to inform the customer. The dispatch process also initiates the raising of a sales invoice to the customer.

This process will differ in the case of service delivery where contracts are often an important aspect of determining service fulfilment. Businesses may also confirm directly with customers that services have been delivered before raising an invoice.

Control points — goods dispatch

1. GDN shipments are recorded accurately and promptly.
2. GDN records cannot be changed post invoice.
3. GDN data are transferred accurately to the invoicing system.
4. All goods shipped are invoiced.
5. Zero-rating requires that goods are exported from the UK within the specified time limits.
6. Official or commercial evidence of goods export as appropriate is obtained within the specified time limits to support zero-rating and retained as required.

Control points — service delivery

1. All services provided are invoiced.
2. Evidence should be obtained if the place of supply is outside the UK.
3. Overseas business customers should provide suppliers with their VAT number.
4. Services are carried out in accordance with the signed contracts in place.

Tax invoice

For both goods and services, a sales invoice is a key accounting and VAT document. In the O2C process, invoices are typically generated primarily from the SO after confirmation of order fulfilment. A clear process and escalation route should be in place to deal with tax code queries.

Control points

1. Invoices are generated using authorised terms and prices, to ensure that the tax base amount is correctly calculated.
2. The correct VAT rate is applied to supplies for place of supply and product liability.
3. Invoices reference the sales order.
4. The VAT amount is correctly calculated, including applicable rounding rules.
5. VAT invoices issued in a foreign currency for supplies of goods or services that take place in the UK must show the total amount of VAT payable in sterling.
6. Sales are recorded against the correct organisational unit.
7. Invoices relate to valid shipments or services.
8. All tax invoices are issued within the deadlines set out in legislation and brought into account in the correct VAT period.
9. The correct time of supply is applied to Tax Invoices.
10. Invoices comply with VAT Regulations 1995 Part 3 invoicing requirements.
11. Sales invoices are posted to ledgers regularly and automated where possible.

Control example — acceptable exchange rates on supplies made:

1. HMRC publishes monthly global foreign exchange rates online.
2. UK market selling rate at the time of the supply. The rates published in national newspapers are acceptable. Other rates may be acceptable with approval from HMRC.

For more information read Transactions in foreign currencies and VAT.

A good example of an exchange rate process would be that HMRC monthly foreign exchange (forex) rates are linked to the ERP system and automatically updated every month with limited to no manual intervention required.

Self-billed invoices

Self-billing is a commercial arrangement between a supplier and customer in which the customer prepares the supplier’s sales invoice and forwards a copy with the payment. The supplier should treat these invoices as sales documents and declare any VAT as output tax on their VAT Return.

For more information read Self-billing (VAT Notice 700/62).

Control points

1. A self-billing agreement should be in place between the customer and supplier before self-billing commences.
2. The agreement should specify start and end dates for the contract.
3. A process should be in place to monitor agreement dates.
4. A 12-month review should take place to check the agreement.
5. The supplier should check the VAT rate determined by the customer, especially for new agreements and new supplies.
6. The supplier should ensure that duplicate sales invoices are not raised for self-billed supplies.
7. The supplier should ensure that VAT on self-billed invoices received is not claimed as input tax.
8. The supplier must inform the customer if they de-register for VAT, transfer the business as a going concern or change their VAT registration number.

Credit notes and adjustments

A credit note (or credit memo) is raised to authorise the return or offset of funds in the event of cancellation, goods returns, accounting error or agreed price reduction. Tax amounts included on a sales credit note will reduce the total VAT payable in an accounting period.

A supplier may issue a debit note to reflect an increase in price, and tax amounts included on a sales debit note will increase the total VAT payable in an accounting period.

Control points

1. Credit and debit notes should be created for valid reasons, be subject to an authorisation and approval process, and issued in accordance with organisation policy.
2. Credit and debit notes must comply with VAT regulations 1995 regulation 15 credit note content, regulation 38(5) recording credit notes in the correct tax period.
3. The rate of VAT to be used for a credit note is the one which was in force at the time of the tax point of the original supply.
4. Credit and debit notes should be accurately calculated, recorded, and issued.
5. The VAT on credit notes should not exceed the VAT on the corresponding original invoice.
6. Credit and debit transactions are recorded against the correct organisation unit.

Receipt of payment

The sales invoice acts as the request for payment for credit sales. The process may include automatic reminders for due (or overdue) payments.

Control points

1. Receipts data are entered and accurately recorded.
2. Early settlement discounts are accurately calculated and recorded.
3. Timely collection of accounts receivable is monitored.
4. Payments received are matched against invoices raised.
5. Bad debt relief adjustment is instigated for unpaid invoices, where the necessary conditions are met.

For more information, read relief from VAT on bad debts (VAT Notice 700/18)